Boo the Tories all you like, but they’re right about saving the economy

Unlike the deluded Left, Conservatives understand there is no pain-free
solution to our woes

Not always applauded: George Osborne and David Cameron were booed at the Paralympics. Something much more radical than their austerity programme is required to restore lost competitiveness and get growth going againPhoto: PA

Both David Cameron and George Osborne found themselves roundly booed at the Paralympics this week. No surprise there, you might think, given that the Government is failing to deliver the economic recovery it promised. And austerity, even in the limited dose so far applied, is never going to be popular.

Rather more startling was that Gordon Brown, the former prime minister and chancellor, was cheered. Memories, it seems, are very short. That little more than two years after losing power, the man who presided over the worst financial road crash of all time could find himself publicly celebrated is quite a turnaround.

Even Brown, who has long believed that the judgment of posterity will be kinder to him than the voters were at the last election, could not have expected such a swift rehabilitation. The Coalition’s lack of progress on the economy seems to have turned him from pariah to fondly remembered elder statesman. It takes a special kind of government incompetence to make Gordon Brown look good, but for a growing number, that’s the way it seems. The longer the economy stagnates, the louder the calls for alternatives.

Few think the shift to the Right signalled by this week’s reshuffle, or indeed the Government’s latest raft of growth initiatives, sufficiently radical to turn the tables. Support for deficit reduction is cracking under the pressure.

This week, both Sir Richard Lambert, the former director general of the CBI, and the British Chambers of Commerce switched from strong support for fiscal consolidation to qualified backing for Labour calls for more stimulus. The International Monetary Fund has likewise come as close as it dares, given that George Osborne has just agreed to increase its funding, to calling for a plan B. Big differences remain as to how the deficit reduction plan might be changed, but for the first time since the election, mainstream business and international opinion is beginning to sing from the same hymn sheet as Labour.

Something of a reality check is called for. The Coalition may be failing on the economy, but the idea that the Left offers credible alternatives is dangerous poppycock.

Almost wherever you look among the world’s major democracies, incumbent governments, whether they are from the Right or the Left, find themselves deeply out of favour. Virtually all the political leaders who were in power at the time the banking crisis first hit have been toppled. Rightly, they have been blamed and punished for their unchecked profligacy and myriad policy misjudgements.

But now the voters have grown weary of their successors, too. Less than a year after sweeping to power, the centre-Right Spanish government of Mariano Rajoy finds itself almost as badly discredited as its socialist predecessor. The same is true of the technocratic government of Mario Monti in Italy, while France has taken only a matter of months to start falling out of love with its newly elected socialist president, François Hollande. That the UK Coalition should find itself in much the same space demonstrates that it is not entirely the failings of the euro, or the particular policy leanings of Left and Right, that lie behind the disillusionment. Nobody, it seems, has the answers.

The US may yet disprove the rule. It still looks more likely than not that Barack Obama will be re-elected, but in a country where one-term presidents are very much the exception, it’s remarkable how badly he’s doing. For his Republican opponent Mitt Romney to be equal in the polls is a truly damning indictment of four years of going nowhere.

Depressingly, the Romney ticket offers little by way of solutions, either. He and his running mate, Paul Ryan, talk the talk of deficit reduction, a small state and a low-tax economy, but from what we have seen of their plans, there’s little reason for hope. Their proposals for tax and spending cuts are an incoherent nonsense. Few can honestly believe they’ll deliver.

It’s the same in France, where Hollande was elected not because voters liked his agenda, but because they wanted to get rid of Nicolas Sarkozy. As it is, Hollande’s scope for action is extremely limited, with no growth, mountainous public debt, rising unemployment and a bankrupt health-care and pensions system. He promised an alternative to Sarkozy’s austerity, but in practice the fiscal squeeze he is enacting is even bigger. Hollande is merely Sarkozy in sheep’s clothing.

To understand what’s really happening here, it is necessary to revisit the underlying causes of the crisis. The consensus is still very much that the main mischief was years of Thatcherite deregulation, which allowed bankers to run riot. In this Brownite narrative, there was nothing much wrong with the pre-crisis economy which sorting the banking system wouldn’t fix. Get the money moving again with repeated rounds of monetary and fiscal stimulus, and demand would quickly return to the way it was. Confronted with the uncomfortable truth that bankrupting governments with deficit spending has failed to work as predicted, proponents argue either that there was simply not enough of such spending, or that it has been withdrawn prematurely. The reality is that the unemployment rate in the US has turned out worse with the Obama stimulus than he predicted it would be without it. There’s a shock.

Regrettably, there is a much more painful and altogether more plausible way of looking at the crisis and its causes than this “get out of jail free” approach. Confronted by a steady loss of competitiveness, governments in many advanced economies started spending more than they could afford to support growth, and they actively encouraged households with low interest rates, credit expansion and misguided social policy objectives to do the same.

Unsurprisingly, this growth has proved unsustainable. To believe that the crisis can be corrected simply by doing more of what got countries into such a mess in the first place is to descend into fantasy.

The mistake that both the financial markets and many economic commentators continue to make is to think that governments, providing they intervene enough, can somehow magic away the problem. In fact, the best politicians can do is simply get out of the way, thereby allowing the natural resourcefulness of their citizens to show through. In attempting to prop things up, governments are only borrowing from the future and delaying the recovery.

Instinctively, the Right tends to recognise these arguments better than the Left, yet they do not make for a popular message. Securing support for an agenda which sweeps away the state and destroys the mollycoddled world voters have grown used to is quite an ask, especially when up against the siren calls of Labour’s “something for nothing” alternative. I’ve long believed that the 2010s are going to feel much like the 1970s, with Western economies in a state of more or less permanent crisis, lurching from one ineffectual government to the next.

Today’s half measures on supply-side reform won’t suffice. Something much more radical is required to restore lost competitiveness and get growth going again – but conditions may have to get a great deal worse before we and our leaders are galvanised to make the necessary changes.